21.1 Both documents concern services, such as radio and
television broadcasting, web-site designs, software and digitised
music and film products, that are supplied electronically across
borders. Under Council Directive 77/388/EEC, these services are
liable to VAT in the country where the supplier is established.
Thus where a supplier outside the Community sells a service to
a customer in the Community, no liability for VAT arises. However,
when a service is supplied from within the Community liability
for VAT arises, regardless of whether the customer is located
in the Community. Consequently, these existing VAT rules create
a comparative disadvantage for suppliers in the Community.

21.2 On 13 February we cleared both documents, but reaffirmed
a request made by the previous Committee in July 2000 for further
information. That Committee specifically requested information
from the Minister concerning any measures that might be necessary
to prevent non-EU businesses distorting competition by simply
registering in Member States with the lowest VAT rate, and the
outcome of any consultations the Government may have had.

The Minister's letter

21.3 In her letter (dated 14 March 2002), the Paymaster
General (Dawn Primarolo) provides the information requested and
some further background material in response to points raised
by our sister Committee in the Lords.

21.4 As regards the practical implications of a registration
regime for non­EU suppliers, the Minister says.

"Under the Commission's original proposals for a single place
of registration in the EU for non­EU suppliers there was
a risk that such suppliers would choose to locate in a Member
State with a relatively low rate of VAT, making all their sales
to private consumers from that location.

"This risk of distortion, in terms of location of registration
and revenue flows, led Member States to reject this approach to
the registration of non­EU suppliers. In the course of negotiations,
the more sophisticated approach now featured in the Spanish Presidency's
compromise text emerged.

"Under this new approach, a non­EU supplier will still
register and account electronically for VAT in one Member State,
so avoiding the compliance costs and administrative complexities
resulting from multiple registrations.

"However, the supplier will identify on his VAT return the
value of sales made to private consumers in each Member State
and the VAT due on those transactions. Having collected these
returns, the Member State in which the supplier is registered
will periodically reallocate the relevant sums of VAT due to the
other Member States.

"This approach thus avoids any distortion in terms of location
of registration, and achieves the effect that goods sold by non­EU
suppliers are taxed at the correct rate of VAT in the Member State
where they are consumed."

21.5 As regards the outcome of consultations with business,
the Minister says:

"The UK's negotiation stance on the Directive has been well
informed by input from the business community. Throughout the
negotiations, HM Customs have maintained an effective dialogue
with business both through formal channels (e.g. a dedicated e­VAT
Forum on which major stakeholders are represented), and less formal
ones such as ad hoc meetings. Priorities for UK business lie in
the creation of a level playing­field with non­EU suppliers,
both by removing VAT on exports and by ensuring that non­EU
suppliers have to charge VAT on their supplies into the EU.

"Customs have also made use of their active involvement in
parallel OECD­led work in this field to secure a better understanding
of, for example, the priorities and concerns of non­EU suppliers,
particularly those in the US. Non­EU suppliers have generally
accepted the logic of a change to the taxation rules, and have
been comfortable with the proposed use of the reverse charge mechanism
for business­to­business transactions.

"However, a key concern for non­EU suppliers has been
the nature of the tax collection regime to apply to business­to­consumer
transactions, where they have repeatedly objected to the imposition
of new and onerous obligations, especially where these would go
beyond those placed on EU suppliers.

"The UK shared these concerns, and made clear in negotiations
that:

one of the essential objectives of moving to an electronic
solution in the medium­term (with taxation in the place of
consumption) was to see all suppliers governed by identical rules
and obligations;

and that any interim solution would have to be as simple as
possible for non­EU suppliers to comply with.

"The UK achieved these objectives, and  while non­EU
suppliers still have misgivings over the registration system proposed
under the interim solution  it is clear to them both that
this is much less onerous than originally proposed, and also that
there is a clear commitment to move to the much more effective
and efficient full electronic solution in the medium­term."

Conclusion

21.6 We have already cleared both documents and recorded
our dissatisfaction with the Department's failure to provide a
prompt response to the previous Committee's request for further
information. We provide this short report to inform the House
and to complete the scrutiny process.